Collaboration and IP Rights: But What About Those Transaction Costs?

Surely one of the main themes of the past decade has been the rise of collaboration in R&D and innovation. Whatever one's slogan--"You collectively is smarter than you individually" or "No more 'not invented here'", both popular and and academic literature are replete with accounts of the challenges and rewards of collaboration as opposed to go-it-alone development. Aided by the universal reach of online communications and infrastructure, as well as the global movement of ideas, resources and manpower, collaboration is championed on both substantial and process grounds.

Against the almost epiphanic adulation in favour of such collaboration, however, there remains a dirty little secret: it is often times devilishly difficult to find a workable arrangement for the allocation of IP rights in such circumstances. Just one example --the mind-numbing exercise of distinguishing between "Background IP" and "Foreground IP" has become a common nightmarish staple in fashioning collaboration agreements. More generally, the challenge of establishing a workable framework for determining ownership of IP rights, both individually and jointly, is daunting under the best of circumstances and is a potential show-stopper in less favourable situations.

It is against this backdrop that I recently read an account in the December 7, 2009 issue of Business Week ("Can Roche Leave Genentech Alone?") of the efforts by Roche to implement its acquisition of the 44% of Genentech that Roche did not previously own (in early 2009, we discussed the Roche-Genentech acquisition on this blog here.) One comment in the piece particularly caught my attention: the observation that the acquistion will finally allow the two companies to work together in an effective manner on what is termed "personalized medicine", with the goal of developing "diagnostics", namely the development of the technologies used by doctors to ascertain better which drugs work with which patients.

What exactly was the reason that the development of these "diagnostics" did not take place before the acquisition, even though Roche already owned over 50% of Genentech? According to the article, the reason centred on the issue of IP rights. "When they were separate, Genentech and Roche rarely tried to codevelop diagnostics, because it took too long to work out patent rights and other legal logistics. 'Now there's no intellectual property discussion, there's no negotiation -- we're the same! ... You wouldn't believe how much easier it is.' "

At first glance, this observation seems to be a testimony to the frictions created by transaction costs with respect to IP rights in collaboration arrangements. In particular, as noted by Wikipedia, "Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on." Here, the argument seems to be that the bargaining costs in arranging for the disposition of IP rights in a collaborative relationship were, at least with respect to the Roche-Genentech relationship before the full acquisition, prohibitive. The result was that wide collaboration regarding diagnostics did not appear to take place.

There is something disturbing in all of this. Can it be that the transaction costs in bargaining the disposition of IP rights in a collaborative arrangement between two separate parties are so daunting that the only feasible solution is for the two parties to merge, thereby eliminating the friction in the contractual bargaining? Think about it: If the answer is "yes", then it calls into question the ability of lawyers to fashion arrangements for collaboration, other than an outright acquisition of one party by the other (was not Oliver Williamson the co-recipient of the 2090 Nobel Prize in Economics for studying this kind of thing?)

Surely (at least I would like to think "surely"), however, lawyers and their clients engage all the time in reaching an arrangement for the disposition of IP rights in collaboration agreements in situations other than an outright acquisition. Sometimes the negotiations over which party will own what IP rights in a collaboration are less rocky, sometimes more so. As the report on Roche and Genentech indicate, sometimes the collaboration dies a legal stillbirth.


Given this range of possibilities, it seems to me that the better question is how we should understand the parameters for effectively bargaining this disposition of rights in the more typical collaboration arrangement, when acquisition of one party by the other is not on the table. Against this background, we can then perhaps better understand what were the particular factors in the pre-acquisition relationship between Roche and Genentech that seem to have paralyzed any effective bargaining of IP rights between them, at least with respect to diagnostics. There may be an interesting MBA case study here to explore these questions. Any takers?

How do you quantify loss of goodwill in the right to use a generic term?

What happens when the owner of a well-established brand (SMIRNOFF) as used in relation to a generic product (vodka) succeeds in an 'extended passing-off'' action against a defendant whose product is branded (VODKAT) in such a way as to cause confusion with and erode the distinctiveness of the generic product? How are damages to be assessed? We may soon find out, now that Mr Justice Arnold has held this morning in Diageo v Intercontinental Brands [2010] EWHC 17 (Ch) that Diageo had indeed suffered such a loss. Said the judge (at paras 231-235):

"The third main issue I have to decide is whether Diageo have suffered, or are likely to suffer, damage as a result of the misrepresentation. Diageo contend that they have suffered, or are likely to suffer, damage under two heads. The first is loss of sales of SMIRNOFF. The second is erosion of the distinctiveness of the term "vodka".

Loss of sales

Diageo accept that: (i) sales lost due to mere competition between VODKAT and vodka, as opposed to sales lost due to confusion, are irrelevant; (ii) most sales lost due to confusion will be sales of brands of vodka other than SMIRNOFF; and (iii) Diageo cannot rely upon lost sales of other brands. Nevertheless, Diageo contend that they have lost some sales of SMIRNOFF to VODKAT due to confusion.

In the on-trade something like 85% of the vodka sold on Optics is SMIRNOFF. ... VODKAT could have a significant effect on the sales of SMIRNOFF in this sector. The majority of these losses must be discounted as being due merely to competition from a cheaper product. Nevertheless, I am satisfied that there will have been some sales lost due to confusion. What I have in mind in particular is the scenario where a pub or bar stocks SMIRNOFF as its main vodka and VODKAT as the "house double" vodka. A customer who is confused will accept the VODKAT, whereas a customer who is not confused may well insist on the real thing.

As to sales through off-licences, no doubt most lost sales will be of other brands. Nevertheless in 2007 A.C. Nielsen estimated that 3% of VODKAT sales were made at the expense of SMIRNOFF. Again, some of these will be due to mere competition, but I am satisfied that others will be due to confusion. This is particularly so in convenience stores where the price differential is often much less than in supermarkets. Even where there is a price differential, ... consumers may decide to buy two bottles of VODKAT rather than one bottle of SMIRNOFF. This is particularly likely in the case of consumers who are under the impression that VODKAT is a weaker version of vodka.

Erosion of distinctiveness

Even if there was no evidence of lost sales, I consider that it is clear that ICB's marketing of VODKAT is likely to erode the distinctiveness of the term "vodka". It will cease to be a term reserved for 37.5% ABV spirits, and will come to be seen as a term applicable to lower strength products which include fermented alcohol. Indeed, I think there is some evidence that this is already starting to happen. The advent of the me-too products like VODKOVA is likely to accelerate this trend if it is not checked".

HMRC on the attack on image rights?

IP Finance thanks Angus Bujalski (Michael Simkins LLP) for the following post:

Amid the general outcry over Manchester United’s proposed £500 million bond issue, one of the many risk factors listed seems to have received undeservingly scant attention. The club noted that it was under investigation by Her Majesty's Revenue & Customs (HMRC) for payments made in relation to players’ image rights. These structures, common in top-flight football, typically involve a player assigning all rights in the exploitation of his image to a company, often offshore. Unlike most civil law jurisdictions, since there is no single concept of an “image right” in English law, the agreements typically include a broad assignment of all rights to use a player’s name, image, likeness, voice, even shirt number, and so on. The club then pays a licence fee to the company for the right to exploit these rights.

Crucially, the clubs argue that these payments should be viewed as capital sums, and therefore not taxed as income, since the payments are made under genuine arm’s length transactions under which the club gets real value for the money paid to the players. HMRC’s position, however, is quite the opposite, arguing that image right structures are artificial schemes designed to avoid tax. Specifically, payments made in this way are not subject to UK income tax or national insurance in the hands of the player, so the clubs can therefore incur less expense to ensure the player receives the same net amount as if the payments were paid as wages. Second, it means the club does not incur the National Insurance costs on the payments it would have to make, were the payments made as wages.

The legality of image rights structures has long been problematic even after the courts first ruled such payments legal in the cases involving Dennis Bergkamp and David Platt. It has been suggested that HMRC have been aching for the opportunity to bring a case to court as a means of overturning these decisions. Indeed, the fear of the courts reversing the Bergkamp decision is one reason why several Premier League clubs do not use these structures.

Now, with public finances stretched, it may be that HMRC are more actively pursuing this opportunity. Any judgment overturning the Bergkamp decision would have serious consequences for many Premier League clubs. The prospectus for Manchester United’s proposed bond issue suggests that the club could be liable for up to £5.3 million in past National Insurance contributions. Of greater concern to clubs, however, would be the increased wage costs, since there is little doubt that players would request their wages be grossed up to leave them in the same net position, particularly as they will be subject to the new higher rate income tax of 50%.

Coincidentally, it was reported last week that the annual profits of Beckham Brand Limited, the company set up to exploit the image rights of David and Victoria Beckham, grew 60% after his first season with the LA Galaxy. Beckham’s return to Manchester United with AC Milan in the Champions League will no doubt serve as a reminder of the real value of the rights to a high profile player’s image.

The Bullring

The Bidvest Wanderers Cricket Stadium, affectionately known as the "Bullring" because of its intimidatory atmosphere, is a relatively small ground with steepish stands capable of accommodating 35000 passionate cricket fans in the heart of Africa’s commercial capital - Johannesburg. Add to this, dramatic thunderstorms, the final test against the English in a must win for the host country, 30 degree heat, some controversy, a fast bouncing pitch and it is very difficult to avoid getting a ticket if you have an opportunity to watch a late afternoon session, like this blogger had on Saturday.

The advantage of a five day cricket test, even in a late afternoon session, is that there is time to observe. If you think that advertising space on the back of a toilet door has value, it is nothing in comparison to the opportunities for marketers to exploit the thinking time of a captive during a cricket test and somewhat healthier for the captive too!

Apart from the RSA ambush of three slips, a gully and short leg to thwart England’s attempt to launch their rearguard action that evening, Investec were taking on Standard Bank (Africa's largest bank) in their own form of aggression - competitive advertising. An electronic billboard flashed relative newcomer Investec every so often conveniently against the backdrop of the impressive Standard Bank hospitality suite. Not only did Investec get the space, the flashes managed to mimic the white on blue colours of the market leader.

Not to be outdone, the food and beverage industry was raging its own battle. Coca-Cola, no stranger to competitive marketing, was doing its best to upstage local market leader in the sports drink category (Energade) with its Powerade billboard alongside. Meanwhile, Nando’s, probably RSA’s most successful international food franchise brands and well known for its opportunistic marketing, found itself selling its food alongside a Nino’s eatery adorned in a similar white and green. It is when you see what happens in sports stadiums that you consider the impact of (and some argue, reason for) the controversially restrictive Metcash ambush marketing decision ahead of the Fifa World Cup 2010 or why the 2003 Rugby World Cup was not offered to New Zealand in 2003, over stadia contractual disputes.

Moving away from competitive marketing, it may be interesting to note that despite the efforts of Steyn, Morkel and/or Parnell, whose bowling caused havoc that evening, their success is unlikely to ever be as commercially valuable to a sponsor as the batting scalps they claim, simply because the advertising space on a batsman’s bat is more prominent for television viewing. There was also a notable absence of law firm advertising. Perhaps this is because of budgets cuts or because sports box hosting is passé for legal service firms?

Finally, during one of the rain/bad light breaks, the electronic scoreboard lit up with a message. It was not a New Year’s message but an order that all spectators “shall not discriminate” described in about 20 words, which included “acts“ which might “intimidate” those of a different “national origin”. Plainly, it did not stop the partisan crowd cheering the fall of an English wicket or the intimidatory marketing on display. It was hardly intended to either.

When Branding Comes to the Rescue of J.P. Morgan Chase

There were three highlights in the financial world during the past week. One was the testimony given on Capitol Hill by the chairmen of several of America's leading financial institutions. Blame, responsibility, contrition and political gamesmanship were all wrapped into a riveting questions-and-answers extravaganza. The second was a speech given by Paul Volker, the former legendary Chairman of the Federal Reserve Bank. The third were the quarterly earnings reported on Friday by the bank J.P. Morgan Chase.

An IP angle to these three events came to me almost by accident, upon listening to a podcast broadcast interview with David Malpass, formerly the Chief Economist of Bear Stearns. During the interview, the question arose about the future of banking and the discussion turned to whether there should be a return to a two-bank structure. The first type of bank is the retail or utility bank, an institution that takes deposits and makes loans, all with presumed low risk. The second type is the investment bank, one that takes much greater risk by engaging in financial trading and the like. Such a division had been roughly mandated by the Glass-Steagall Act, a piece of US legislation crafted in the early 1930s and repealed in the late 1990s.

What does this have to with IP? The answer is found in an observation made by Malpass into question asked about whether it was feasible to conceive of a return a Glass-Steagall world. His reply, at least with respect to J.P. Morgan Chase, was fascinating. He observed that the bank was in some sense preparing for such a possible eventuality. It was doing so by branding it services. Namely, the bank branded its retail services under the "Chase" name, while it branded its investment services under the "J.P. Morgan" name.

Just to put the bank in perspective. As noted by Wikipedia,

"JPMorgan Chase & Co. is one of the oldest financial services firms in the world. It has operations in 60 countries. It is a leader in financial services with assets of $2 trillion, and the largest market capitalization and third largest deposit base U.S. banking institution behind Wells Fargo and Bank of America. The hedge fund unit of JPMorgan Chase is the second largest hedge fund in the United States with $32.893 billion in assets as of 2009. Formed in 2000, when Chase Manhattan Corporation merged with J. P. Morgan & Co, the firm serves millions of consumers in the United States and many of the world's most prominent corporate, institutional and governmental clients."

In other words, while the bank in principle maintained both retail and investment banking under one corporate roof, in effect it was using a dual branding strategy that seems to address two goals. The first is to send separate and distinct messages to two quite distinct types of banking customers. One is the retail customer, who can find comfort under the venerable Chase name, long identified with retail banking services. The other is the institutional customer seeking investment services and who feels equally at home at the bank, relying on the J.P. Morgan name that hearkens back nearly a century to its eponymous founder.

The second goal is to hedge the bank's bet against the possibility of a return to a Glass-Steagall regime. In such a situation, a bank that tries to brand both its retail and investment services under a single brand will find it quite difficult to disentangle the two services in the public eye, should it be required to do so. The beauty of the branding strategy of J.P. Morgan Chase is that it seems to address this problem head-on in a promising way, if the bank is ever required to split into two.

J.P. Morgan Chase has been widely praised for its resilience during the Great Recession and its chairman, Jamie Dimon, has been well-nigh iconized for his leadership. Add, perhaps, to the enlightened management of the bank during these troubled times the adoption of branding strategy attuned to the bank's needs.

The Saga of Automobile Brands--Then and Now

There are few subjects in branding more interesting that the changing nature of brand identity within an industry over time. Few industries have a sufficient historical half-life to allow one to step back and contemplate how the message conveyed by the brand has developed and how it has been transformed. Of those few industries that do fall within this category, none spans a broader swath of time and contains within it a more engrossing branding saga than the auto industry.

I was reminded of this in listening recently to a radio interview with Paul Ingrassia, the Pulitzer-prize winning journalist from the Wall Street Journal. The occasion was the annual North American Auto Show, held each year in January in balmy Detroit, in which the leaders of the (troubled) auto industry gather together to exhibit new models and technology, and to exchange pearls of wisdom with the assembled press corps.

More particularly, Ingrassia was interviewed in conjunction with his new book, Crash Course: the American Automobile Industry's Road from Glory to Disaster, published on Jan. 5, 2010. What was particularly interesting for me was Ingrassia's comments on the changing nature of the message conveyed by the dominant auto brand. Ingrassia described four different branding periods.

First, there was Henry Ford nearly a century ago, offering the legendary Model T in a single color for the emerging American middle class. The emphasis of the Ford brand seems to have been about manufacturing efficiency and product availability.

Second was the radical reformulation of the auto industry orchestrated by Alfred Sloan of GM during the period from the 1920s to the 1950s. The brand became the paramount focus, whereby Sloan carefully cultivated a hierarchy of brands, from most modest to most luxurious, designed to mirror a customer's increasing affluence and success. The message was clear--you are what you drive, the various brands carefully calibrated to convey the branding message to the public, while at the same time turning one's vehicle at any given point in time to an emotive love-fest between man/woman and the machine.

Third, there was the ascendancy of the Japanese car industry in the 1980s, most notably Toyota and Datsun/Nissan. Brands were rationalized from the hierarchy of the GM days to a small number of brands, all tied together by manufacturing prowess and a customer perception of quality superior to that of their U.S. competitors. One loved his Toyota because it was the perfect combination of styling, price and quality. By concentrating this coherent and consistent message in a very small number of brands, the Japanese car manufacturers were able to prevail over the more scattered message of the plethora of GM (and equivalent) brands.

Fourth, we have the rise of the Korean car industry and in particular Hyundai, which Ingrassia describes as the current star of the auto industry. In comparison to Toyota's documented manufacturing difficulties over the last 6 months or so, Hyundai has been able to convince the public that its brand stands for value, quality and reliability, without the frills, but perfectly attuned to the expectations of the consumer against the backdrop of the global recession. People may have a love affair with their Hyundai, but it seems to be a romance of convenience rather than passion.

There you have it. It will be interesting to interview Ingrassia in another decade and to hear whether the current dominant brand will then be coming from India or China and, if so, what is the message conveyed by that brand.

Patents - Do Guys Think You’re Worthless?

Hidden away in Vienna, the European Patent Office (EPO) has a Directorate of Databases and Promotion that offers IPScore, a “free-of charge tool to support the patent strategy of companies, mainly SMEs, and to steer the volume of applications by eliminating potentially “worthless” applications.” Intrigued, the Licensing Executives Society Britain & Ireland recently arranged for the EPO’s Johannes Schaaf to give an afternoon workshop on the tool.

IPscore®

Perhaps not surprisingly given its name, the tool is a scoring system of the kind familiar to many of us from women’s’ magazines (try e.g. cosmo_quiz_do_guys_find_you_intriguing). For each of forty questions about the target patent, the user is asked to choose one of five responses, each response having a different score. The questions fall into five groups covering “legal status”, “technology”, “market conditions”, “finance” and “strategy”.

On completion of the questionnaire, the user is provided with a radar plot illustrating the eight or so responses for each group of questions. As is usual with such plots, these can be used to highlight strengths and weaknesses of the patent. The tool also prepares a “quick and dirty” monetary valuation of the patent.

Using the tool on a portfolio of patents also generates a 4x4 grid illustrating the relative risk and opportunity of each portfolio member. This allows “worthless” high risk/low opportunity patents to be culled. Readers may recognize similarities here with the new product portfolio management work of Cooper and Edgett.

Herr Schaaf took pains to stress that IPScore was primarily a qualitative tool that provides a guide for locating potential gains / cost savings. Given that the tool demands answers from legal, technology, marketing, finance and strategy departments, he also suggested that it was a means for promoting dialogue about patents within the company.

Unfortunately, the limited time available did not allow discussion of the theory and data underlying the tool, which was apparently developed by the Copenhagen Business School in collaboration with the Danish Patent Office. In particular, it was not clear whether all forty questions were given equal weighting or whether some, e.g. “what is the market growth in the business area where the patented technology is utilized” were weighted more heavily than others, e.g. “what is the status of the patent”. As often noted by Neil Wilkof on this blog (see e.g. here), IP is sometimes more crucial, sometimes less crucial to the success of a particular company and its activities.

The EPO are also targeting the tool at SMEs. Again, there was no time to explore the EPO’s reasoning for this: Does the EPO believe that large companies do not require help with patent strategy? Do large companies not have potentially worthless applications? Or does the EPO believe that large companies have better ways of managing their IP, in which case should not such techniques be made available to the IP managers of small technology companies, where IP may in fact be more important than in large companies?

This post was guest-blogged by Ian P. Hartwell